Dollar-cost-averaging is a strategy in which an investor layers in a set investment amount over time to reduce the impact of volatility on the overall purchase. I generally adopt this approach across my portfolio by using dividends to layer into stocks that I find to be attractively valued and are trading well off their 52-week highs. In this article, I’m focused on AbbVie (
A Look Into AbbVie
AbbVie is a leading pharmaceutical company that specializes in oncology, immunology, and neuroscience. Through its acquisition of Allergan, AbbVie has gained additional expertise in neurology and gastroenterology. This also includes the blockbuster drug Botox, which has both aesthetic and therapeutic applications, such as for migraines, movement disorders, and overactive bladder. I particularly like Botox as it is both a household name and a cultural phenomenon. This bodes particularly well for the drug’s pricing power, due to its strong brand recognition.
Humira still represents as AbbVie’s flagship drug, as it generated $4.8 billion in revenues during the company’s second quarter, representing 46% of its total revenue. One of the challenges for Humira is biosimilar competition in Europe. This hurt Humira’s international revenues, as its sales were down by 20% YoY. On the bright side, however, Humira is still protected by patents in the U.S., where 82% of its Humira revenues reside. This is in effect through at least January 2023, during which Amgen’s (AMGN) Humira biosimilar will be the first to launch.
This helped to offset international weakness, as Humira’s U.S. revenues were up by 4.8% YoY, resulting in a total Humira revenue decrease of just 0.7% YoY. Looking forward to Q3 and the rest of the year, I expect Humira revenues to show better growth, as the first-half’s results were impacted by a deferment of doctor’s office visits. This is supported by management’s guidance for full-year Humira sales growth of 8% in the U.S. and total $3.5 billion sales internationally.
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In addition, I don’t see Humira’s competition in 2023 as being a race to the bottom. Unlike generic drugs, biosimilars are biologically different from the original drug, and they have to go through a rigorous FDA approval process. Biosimilar manufacturers also have significant costs that they must recoup through drug pricing. As such, I still see Humira as being a top-selling drug in the years after LOE (loss of exclusivity). This is supported by Pharma Manufacturing, which expects Humira to remain the top-selling drug in 2024.
Going forward, I expect to see continued strength for AbbVie into the second half of the year. This is supported by strong results from its next-generation drugs in immunology (Skyrizi and Rinvoq) and oncology (Imbruvica and Venclexta), many of which showed strong double-digit growth, which contributed to the overall 26% YoY revenue increase during Q2. While Botox revenues were down during Q2, I expect second-half 2020 to show better results, as management noted in early Q3 that global aesthetic revenues were approaching 95% of pre-COVID-19 levels.
This is further supported by Venclexta’s FDA approval on October 19th for the treatment of acute myeloid leukemia, and the application that AbbVie filed on the same day for the expanded indication of treating atopic dermatitis.
One of the concerns around AbbVie has been around its debt-funded acquisition of Allergan. I would find this to be concerning for companies with a poor track record of capital allocation. However, I do not find this to be the case for AbbVie. Digging into the company’s financials, I found that its net debt balance decreased by 21% from Q1’19 to Q1’20 (pre-Allergan acquisition). The current net debt balance sits at $81.4 billion, and I’m encouraged by management reiterating its commitment to deleverage the company’s balance sheet, with the goal of achieving a net debt-to-EBITDA ratio of 2.5x by the end of 2021, with further deleveraging through 2023.
In the meantime, AbbVie share price has been on a roller-coaster ride over the past 6 months. As seen below, the share price is well-off its 52-week high of $101.28 and is sitting at just over 5% above the price point from 6 months ago.
(Source: Seeking Alpha)
I’m encouraged to see that management is guiding for a midpoint of $10.40 EPS this year, which represents 16.3% YoY growth.
Based on the YoY EPS growth estimates above, I wanted to calculate what the PEG ratio is, based on the following inputs:
- Price – $84.31
- EPS – $10.40 (midpoint of FY 2020 guidance)
- EPS Growth Rate – 14.4 (based on the average of FY 2021 and 2022 growth rates above)
With the inputs above, I arrive at a PEG ratio of just 0.56. Using a PEG ratio of 1 as a standard for fair value, the shares appear to deeply undervalued.
Analysts seem to agree that the shares are undervalued, with an average price target of $109.21, which sits 30% above the current share price. In addition, on October 16th, JPMorgan (JPM) gave AbbVie a $120 price target, which implies a 42% upside from the current price.
In the meantime, I find the current 5.6% dividend yield to be safe and attractive, especially in this low-yield environment, with a dividend-to-earnings payout ratio of just 45% and a 5-year dividend CAGR of 21%.
AbbVie has been somewhat of a battleground stock due to Humira representing a bulk of its revenues. However, I see management as doing a good job of diversifying away from this exposure with its next generation of drugs, and I expect Humira to remain a top-10 selling drug for at least several years after LOE. In addition, management has a recent track record of paying down its debt before the Allergan acquisition, and has reiterated its commitment to deleveraging the company’s balance sheet.
I see strong upside for the shares, based on the valuation exercise and the reasons stated above. At the current price of $84.31, the shares are trading at a blended P/E ratio of just 8.3, which is generally reserved for stocks with a no-growth future, and I do not believe that to be the case with this stock. As such, I find the current valuation to be attractive for dollar-cost-averaging.
(Source: F.A.S.T. Graphs)
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Disclosure: I am/we are long ABBV. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Additional disclosure: This article is for informational purposes and does not constitute as financial advice. Readers are encouraged and expected to perform due diligence and draw their own conclusions prior to making any investment decisions.